Dependent

Article Dean Dorton

There were some changes made to the child tax credit rules in the new tax bill. The amount of the credit was increased, the adjusted gross income phase-outs were increased, a new non-child dependent tax credit was added, and limits were added to the refundable portion of the tax credit. The changes are summarized in the below table.

Old Law New Law
Qualifying Child Tax Credit $1,000 per child UNDER age 17 $2,000 per child UNDER age 17
Qualifying Dependent Tax Credit N/A A $500 nonrefundable tax credit is added for qualifying dependents other than qualifying children
AGI Phase-Outs The child tax credit is reduced $50 for each $1,000 of modified gross income (AGI) over $75,000 for single individuals or heads of households, $110,000 for married individuals filing jointly, and $55,000 for married individuals filing separately. The child tax credit is reduced by $50 for each $1,000 of modified gross income (AGI) in excess of $400,000 for married individuals filing jointly, and $200,000 for all other taxpayers. The phase-outs are not indexed for inflation.
Refundable Credit If the child tax credit exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit (also known as the “additional child tax credit”) equal to 15% of earned income in excess of $3,000 (the “earned income” formula).

The maximum refundable tax credit cannot exceed $1,000.

 Same as the old law, except the additional child tax credit is equal to 15% of earned income in excess of $2,500 instead of $3,000.

The maximum refundable tax credit cannot exceed $1,400. This amount will be indexed for inflation in increments of $100.
Alternative Formula Families with three or more children may determine the additional tax credit using the alternative formula if it results in a larger credit under the earned income formula. Under this formula, the additional child tax credit equals the amount by which the taxpayer’s Social Security taxes exceeds the taxpayer’s earned income credit. Same as old law
Social Security Numbers No credit will be allowed unless the taxpayer includes the name and Social Security number of the qualifying child on the taxpayer’s tax return. The Social Security number must be issued on or before the filing due date (including extensions) of the taxpayer’s return. There is still a Social Security number requirement for the qualifying child tax credit, but there is not a Social Security number requirement for the $500 non-child dependent tax credit. If a qualifying child does not have a Social Security number, they are still eligible for the $500 non-child dependent credit.

Article Dean Dorton

If you have a child in college, you may be eligible to claim the American Opportunity credit on your 2016 income tax return. If, however, your income is too high, you won’t qualify for the credit — but your child might. There’s one potential downside: If your dependent child claims the credit, you must forgo your dependency exemption for him or her. And the child can’t take the exemption.

The limits

The maximum American Opportunity credit, per student, is $2,500 per year for the first four years of postsecondary education. It equals 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses.

The ability to claim the American Opportunity credit begins to phase out when modified adjusted gross income (MAGI) enters the applicable phaseout range ($160,000–$180,000 for joint filers, $80,000–$90,000 for other filers). It’s completely eliminated when MAGI exceeds the top of the range.

Running the numbers

If your American Opportunity credit is partially or fully phased out, it’s a good idea to assess whether there’d be a tax benefit for the family overall if your child claimed the credit. As noted, this would come at the price of your having to forgo your dependency exemption for the child. So it’s important to run the numbers.

Dependency exemptions are also subject to a phaseout, so you might lose the benefit of your exemption regardless of whether your child claims the credit. The 2016 adjusted gross income (AGI) thresholds for the exemption phaseout are $259,400 (singles), $285,350 (heads of households), $311,300 (married filing jointly) and $155,650 (married filing separately).

If your exemption is fully phased out, there likely is no downside to your child taking the credit. If your exemption isn’t fully phased out, compare the tax savings your child would receive from the credit with the savings you’d receive from the exemption to determine which break will provide the greater overall savings for your family.

We can help you run the numbers and can provide more information about qualifying for the American Opportunity credit.

Article Dean Dorton

Most companies want to provide their employees with the best medical benefit coverage; however, healthcare costs and the cost of medical insurance continue to increase. One way to help reduce your costs is a dependent eligibility verification audit.

It is estimated that 4% to 8% of dependents nationwide are ineligible to participate in their company’s medical plan. It is also estimated that a company’s annual average cost of medical coverage for a dependent is approximately $3,300. We have seen these national estimates hold true in the clients that we have worked with in the past year.

So how do you identify the ineligible dependents?

The best way is to conduct a dependent eligibility verification audit. Your company can perform this audit, or a third party can be brought in to assist you. Dean Dorton would be happy to guide you through the process and perform the audit for you. Dependent eligibility verification audits can be very sensitive. They are very time consuming if it is not done properly, and dependents could be wrongly removed from the plan, upsetting employees.

The goals of a dependent eligibility verification audit are to achieve a high response rate from your employees and to make sure that only those who are ineligible for coverage are removed – not to remove the maximum number of dependents in the shortest period of time. We highly recommend partnering with Dean Dorton because we are trained and experienced in performing audits. Our services are designed to:

  • Meet the specific needs and objectives of each client
  • Achieve the highest response rate and compliance rate
  • Properly handle a significant volume of confidential data
  • Provide open, strong communication channels with employees and management
  • Provide value and cost savings

If you would like to learn more about the solutions we can provide, please contact Jim Tencza at (502) 566-1071 or jtencza@deandorton.com to set up a consultation today.


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